Emma Wall: Hello and welcome to Morningstar. I am Emma wall and here with me today to give his three stock picks is Jacob de Tusch-Lec, manager of the Artemis Global Income Fund. Hello, Jacob.
Jacob de Tusch-Lec: Hey, Emma.
Wall: So, what's your first stock today?
Tusch-Lec: The first one I'd like to mention is the largest position in my fund. So, I've put a lot of capital behind this name for a while and it's an American name called AbbVie (ABBV). It's a pharmaceutical, so it's a pretty defensive business. It's not the best pharmaceutical in the world in the sense that the lion's share of their revenues come from one drug and that's the risk with this stock that it has one drug that goes ex-patent in 2016, but it's one of the best drugs in the world, it's called HUMIRA, an autoimmune drug.
And I think people underestimate how much firepower there is still in this drug. There are no generics coming around the corner. And what makes this a special situation on top of this is that AbbVie is in the process of acquiring Shire (SHP). So, this is a sort of one-drug stock that's moving to become a much more diversified company with a bit of a growth kicker. And although inversion might not be as beneficial as was before because the American Treasury is taking away some of the tax benefits, they will be better off after having acquired Shire. So, I just really hope this deal will actually happen that they will close it towards the end of the year and at the beginning of next year you will have a really good global pharma stock at probably the lowest multiples of all the global names in this sector.
Wall: Because presumably right now everybody knows that it's a one-drug stock, that's priced in?
Tusch-Lec: It is priced in and then we can discuss how quick it will come, the revenues are going to come down. But for the past two years the revenue growth has not been as negative as people had expected. So there is a risk here, but it is one of those stocks where they could come with a positive surprise and I really think that this acquisition shows that they are doing something about the risk because they are being too concentrated around one drug. So, I think this is one of the few stocks in the universe where you could see not only earnings upgrades next year but also multiple expansions. Multiple expansion is tough to get in a sector that's already probably fair valued.
Wall: What's your second stock?
Tusch-Lec: The second stock is a much riskier name, but also in many ways a bit more exciting. It's a frontier stock. Frontier has been very hot this year. Frontier markets, Nigeria, smaller countries in Africa, and countries like Georgia where this stock is, have outperformed emerging markets as well as developed markets.
So, the stock is called Bank of Georgia (BGEO) based in Tbilisi and it's a small bank. What makes it attractive for U.K. investors is that it's listed in the U.K. Believe it or not, it's a FTSE 250 name, so you get a bit of good corporate governance that comes with a premium listing in the U.K.
What's exciting about this is that Georgia is a small country, five million people, $3,500 GDP per capita. So there is a lot of room for both growth in the economy which usually takes banks and lending with them and on top of that credit levels are quite low. People don't yet have mortgages and personal lending is not very developed. So, I think this is a bank that over the next decade could grow 20% a year, but of course the risks are geopolitical. What's going on in Ukraine could have a spillover and there are also risks around the overall political environment when there are elections. So, it's a much, much riskier stock, but I think it's one of those names that the Bank itself has good corporate governance and if one is willing to take a longer-term view, you could get very good sustained organic secular growth.
Wall: What's the third stock today?
Tusch-Lec: So, the third stock is almost like a cluster of stocks and basically I think the best trade in Europe right now is the Southern European carry trade and by that I mean, buying high-yielding boring stocks that yield 4%, 5%, 6% at a time when Draghi is running negative interest rates. If we think that Europe is essentially going to have low rates for at least the next five years and I think we could look maybe at the next decade, I think that it makes a lot of sense buying a regulated utility like Enagas (ENG) or Endesa (ELE) where half of the business is regulated in Spain, buy these utilities that are yielding 5%, 6% and just clip the coupon.
If the market wakes up and says, Draghi is going to have very low rates for five years, we want more of these bond proxies in Europe, you could actually see multiple rerating, i.e., the yield will be compressed down to, let's say, 3%, 4% which would give you some capital return as well. So, on top of a very defensive business model and a very good dividend, you could also get some upside. So, I think buying sort of bond proxies in Southern Europe is probably not a bad thing when deflation is around the corner and we know that they are going to be printing money for a while.
Wall: And 3%, 4% is not bad actually. As you mentioned, if we are in a deflationary environment and interest rates are zero, 3%, 4% is still attractive?
Tusch-Lec: It's fine. I don't like buying stocks just for the dividend. I like to see the share price going up as well. But I think we are in a world now where interest rates are going to go up in the U.K. and the U.S., it's just the question of time, but they are not in Europe. So, from a relative point of view, I'd much rather hold the utility in a sort of basket case economy where you know rates are going to be low for a while than buy it in economies where you have a cyclical recovery.
Wall: Jacob, thank you very much.
Tusch-Lec: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
